Emergent BioSolutions Inc.
Q3 2007 Earnings Call Transcript

Published: 3 Nov 2007

[Operator:]

Good day, ladies and gentlemen, and welcome to the ThirdQuarter Emergent BioSolutions Earnings Conference Call. My name is Lacey, andI'll be your operator for today's call. At this time, all participants are in alisten-only mode. We will conduct a question and answer session towards the endof this conference (Operator Instructions). As a reminder, this conference isbeing recorded for replay purposes. I would now like to turn the presentation over to our host,Mr. Robert Burrows, Vice President of Investor Relations. Please proceed.

[Robert Burrows:]

Thank you. Good morning, ladies and gentlemen, and thank youfor joining us today as we discuss Emergent BioSolutions financial results forthe third quarter of 2007. As is customary, our call today is open to allparticipants. In addition, the call is being electronically recorded andis copyrighted by Emergent BioSolutions. My name is Bob Burrows and I am VicePresident for Investor Relations for the company. Joining me this morning willbe Fuad El-Hibri, our Chairman and Chief Executive Officer, and Don Elsey, ourChief Financial Officer. Additional other members of senior management will bepresent on the call for purposes of Q&A. The agenda for today's call isstraightforward. Following my brief introduction, Fuad will briefly discussthird quarter results as well as third quarter accomplishments, progress ontyphoid and an update on DoD. Don will then review our financials for the third quarterand the first nine months of 2007 and will also discuss the upward revision toour 2007 revenue guidance. We then will move to the customary Q&A session.Please note that any statements about the company's prospects or futureexpectations are forward-looking statements. As you know, forward-looking statements involve substantialrisks and uncertainties, and actual results may differ materially fromexpectations. Please refer to the press release issued earlier today and,importantly, to our filings with the SEC for more information on the risks anduncertainties that could cause actual results to differ. Also, Emergent BioSolutions assumes no obligation to updatethe information in today's press release or as presented on this call except asmay be required by applicable laws and regulations. Today's press release maybe found on our website at www.emergentbiosolutions.com, either the home pageor under investors/press releases. And with that brief introduction, I would now like to turnthe call over to Fuad El-Hibri, our Chairman and CEO. Fuad?

[Fuad El-Hibri:]

Thank you, Bob. Good morning, everyone. Thank you forjoining us today on our quarterly conference call. This morning, we announced financial results for the thirdquarter and first nine months of 2007. In summary, for the third quarter, wereported total revenues of $43.6 million and net income of $2.8 million, or $0.10per share. At September 30th, we have cash and cash equivalents of $24.3million and $42 million of accounts receivable. During the quarter, we announced the signing of a multi-yearcontract with HHS valued at up to $448 million. Under this contract, HHS hasagreed to purchase 18.75 million doses for a firm fixed-price of $400 million.We would receive an additional $34 million upon obtaining regulatory approvalfor four-year dating. I will go into more detail on this contract in a moment. We are also cultivating additional markets for BioThrax,most notably foreign governments. We continue to establish relationships withforeign governments, and recently, we successfully completed the meaningfulsale of BioThrax to an allied foreign government. We are pursuing regulatory approval in a number of foreignjurisdictions and have had numerous discussions with representatives of alliedforeign governments interested in purchasing BioThrax. We aim at further expanding our international marketopportunities and remain encouraged by our recent sales and the current levelof interest from several governments around the world. Given the positive developments to date, including theexpanding demand for BioThrax, we are pleased to announce an increase in ourrevenue projections for the year to now reflect an anticipated year-over-yeargrowth of 16% to 18%. We also continue to anticipate positive net earnings for theyear. With that introduction, I will now take you through a more detaileddiscussion of our accomplishments for the third quarter, notably the HHScontract and the NIAID/BARDA funding for our anthrax immunoglobulin candidate,a review of more recent news regarding progress within our commercialportfolio, specifically our oral typhoid vaccine candidate, and an update onthe current status of our negotiations with DoD. In reviewing our accomplishments for the most recentquarter, there are a number of milestones that I would like to highlight.First, the HHS contract. As we previously announced on September 26th, wesigned the largest contract in the history of our company, a multi-yearcontract with HHS valued at up to $448 million. Components of this multiyear contract include $400 millionfirm fixed-price for delivery of 18.75 million doses of BioThrax for inclusionin the Strategic National Stockpile, $34 million for receipt of regulatoryapproval of four-year dating for BioThrax payable through a combination of alump sum payment reflecting a price per dose increase for certain dosesdelivered prior to approval and an increase in the per dose price to be paidper doses delivered following approval. Up to $11.5 million in milestone payments in connection withadvancing our post-exposure indication program for BioThrax, and $2.2 millionfor logistics and other related support services. The contract runs through September 2010. It is important tonote that the 18.75 million doses reflect the maximum number of doses indicatedin the original RFP issued by HHS on May 3rd. At the time we announced the contract, we anticipateddelivering at least 6 million doses of BioThrax into the Strategic NationalStockpile by year-end. We continue to be on track to meet that goal. During the third quarter, we completed the first delivery ofdoses, which generated revenues of $41.8 million. Importantly, these doses weresold to HHS at a discounted price due to the slightly reduced remaining shelflife for these specific doses. This discount only applies to the first 5.5 million doses ofthe 6 million doses to be sold and delivered to HHS this year. This discountwill not apply to any other doses to be sold and delivered to HHS under thecontract in the following years. This contract provides visibility to our future revenuesthat will support the development of our product pipeline and growth strategy.I would now like to talk about our anthrax immunoglobulin candidate, which weexpect will be our next revenue source, driven by what we anticipate will bethe government's continued demand for doses of an anthrax therapeutic and theirpreference to have multiple suppliers. In September, the National Institute of Allergy andInfectious Diseases, National Institutes of Health and the Biomedical AdvanceResearch and Development Authority agreed to provide us with up to $4.5 millionin development funding to support non-clinical and clinical studies of ouranthrax IG product. We're developing our AIG product candidate as anintravenous therapeutic for treatment of patients who present with symptoms ofanthrax disease following exposure to anthrax. Earlier this year, AIG received fast-track designation fromFDA. With this recent funding, in combination with previous development fundingof $3.9 million from NIAID in 2006, we are encouraged by the government'scontinued funding commitment to our anthrax IG product. We are honored to continue our longstanding relationshipwith the U.S. government and appreciate the dedication and professionalism ofthe senior leadership within HHS and BARDA in taking these important stepstowards enhancing our domestic biodefense infrastructure. Let me now take a moment to update you on recentdevelopments within our advanced pipeline, specifically our lead candidate, ouroral typhoid vaccine. As you know, our typhoid product candidate is part of ouradvanced stage pipeline, which also includes our hepatitis B therapeuticvaccine candidate and our Group B strep vaccine candidate. On October 10th, we announced the completion of a Phase IIclinical study of our oral typhoid vaccine candidate. The Phase II studydemonstrated that our single-dose drinkable typhoid vaccine candidate achievedthe study endpoints for safety and immunogenicity. In this clinical study, we recruited children between 5 and14 years of age. A total of 101 children received a vaccine candidate and 50children received placebo. This clinical study, which was conducted in Vietnam,is the first study of this product candidate in a pediatric population in aregion in which typhoid is endemic. The trial was performed in collaboration with OxfordUniversity and the Hospital for Tropical Diseases in Vietnam. Clinical studywas financially supported by the Wellcome Trust, which also provided supportfor the Phase I study of our candidate. The data from this Phase I, excuse me, Phase II clinicalstudy, which is still being analyzed, supports the following key findings.Vaccine was immunogenic and met the predefined criteria of an overall immuneresponse rate of greater than 50% with 95% confidence. Vaccine inducedsignificantly higher antibody concentrations, indicative of systemic responsesin children in the vaccine group compared to the placebo control group. Vaccine was well tolerated with no serious adverse events ordeaths reported and no subject withdrew due to adverse events. And overall,there were no statistical differences in the incidence of adverse eventsbetween the vaccinated and placebo-treated groups. This data is encouraging and indicates promise for whatwould be the first single-dose strength of typhoid vaccines. Typhoid is endemicin many developing countries, putting countless international travelers andfamilies who visit these nations at risk. This infectious disease claimsapproximately 200,000 lives each year worldwide. We are encouraged by the continued development success ofour typhoid vaccine candidate and look forward in the coming months toproviding additional detail on the Phase II data, as well as visibilityregarding our next steps with this promising product candidate. Now, an update on DoD. At a quick review on May 7th of thisyear, DoD issued a request for proposal for BioThrax. We submitted our responseto DoD in July. We have been in discussions regarding the supply of BioThrax toDoD and have been reassured that DoD's operational requirements remain and thatDoD has continued commitments to procure BioThrax for its active immunizationprogram. However, we anticipate that the procurement process willtake longer than previously expected. The reason for this is the recent GAOreport and Presidential Directive, which outlines the U.S. government'sobjective to enhance coordination and cooperation among federal agencies withrespect to countermeasures, procurement and stockpile management. As I stated earlier, we believe DoD's operational requirementsremain and that DoD has the continued commitment to procure BioThrax for itsactive immunization program. While we are confident that this procurement willbe completed, the timeline has now been pushed out into the next year by therecent reports that I have just mentioned. In conclusion, as I began my comments, we are a profitablebiopharmaceutical company with growing revenues. We are focused on expandingthe market for our products as well as developing and commercializing newproducts that address multiple growing market opportunities worldwide. That concludes my prepared comments. I will now have mycolleague, Don Elsey, Emergent's Chief Financial Officer, take us through ourfinancial results for the third quarter of 2007 and our revised financialguidance for the year. Don?

[Don Elsey:]

Thank you, Fuad. Good morning, everyone. As Fuad mentioned,we released our third quarter 2007 financial results this morning prior to theopening this month. We will be filing with the SEC our quarterly report on form10-Q later today. The press release is available on our website today and theForm 10-Q will also be available on file on our website and on the SEC'swebsite. We are very pleased with our results for the third quarter of 2007 andfor the first nine months. These results reflect our ability to deliver product to bothDoD and HHS and to fund our continued product development programs. During thethird quarter of 2007 and through the first nine months of the year, thefinancial results we have achieved are aligned with our internal expectations. With this background, I will begin the discussion of ourfinancial results. In terms of format, for each financial element discussed, Iwill first address the third quarter period followed by the nine-month period.And we'll start with a discussion of product revenues. Product sale revenues increased by $900,000 to $41.8 millionfor the third quarter of 2007, up from $40.9 million for the third quarter of2006. This increase in product sales revenues was primarily due to a 43%increase in the number of doses of BioThrax delivered, offset by a 29% decreasein the average sales price per dose attributable to the discounted price thatFuad indicated earlier. This discounted price provided to HHS was due to theslightly reduced remaining shelf life for those specific doses delivered. Thisdiscount will apply to a portion of the doses remaining to be sold anddelivered to HHS during 2007. Again, as Fuad mentioned, we do not expect thisdiscount to apply to any other doses to be sold and delivered to HHS under thecontract. Product sales revenues for the third quarter of 2007consisted of BioThrax sales to HHS of $41.8 million, as compared to productsale revenues for the third quarter of 2006, which consisted of BioThrax salesto HHS of $17.5 million and to the DoD of $23.4 million. For the first ninemonths of 2007, product sales revenues increased by $28.5 million to $89.8million for the first nine months of 2006. This increase in product sales revenues was primarily due toa 76% increase in the number of doses of BioThrax delivered, partially offsetby a 17% decrease in the average sales price per dose attributable to the samefactors that applied to the three-month product sales figures. Product sales revenues for the first nine months of 2007consisted of BioThrax sales to HHS of $63.5 million and sales to the DoD of$26.2 million. Product sales revenues for the first nine months of 2006consisted of BioThrax sales to HHS of $35.4 million and sales to the DoD of$25.3 million and aggregate international and other sales of $630,000. Moving on to contracts and grant revenues. Contracts andgrant revenues increased by $600,000 to $1.9 million for the third quarter of2007, up from $1.3 million for the third quarter of 2006. Contracts and grant revenues for the third quarter of 2007consisted of recognition of $500,000 related to the amortized upfront paymentreceived in 2006 and development service revenue from the Sanofi Pasteurcollaboration, grant revenue from NIH of $900,000 and grant revenue from theWellcome Trust of $400,000. Contracts and grant revenues for the third quarter of 2006consisted of the amortized upfront payment received in 2006 and developmentservice revenue from the Sanofi Pasteur collaboration. For the first ninemonths of 2007, contracts and grant revenues decreased by $1.1 million to $3.5million from $4.6 million for the first nine months of 2006. Contracts and grant revenues for the first nine months of2007 consisted of $2.2 million for recognition of the upfront payment receivedin 2006 and development service revenue from the Sanofi Pasteur collaboration,grant revenue from NIH of $900,000 and grant revenue from the Wellcome Trust of$400,000. Contracts and grant revenues for the first nine months of2006 consisted of $3.2 million from the recognition of the upfront payment anddevelopment service revenues from the Sanofi Pasteur collaboration and $1.5million in grant revenue from the Wellcome Trust. We'll move on to the cost of product sales and grossmargins. Cost of product sales increased by $4.1 million to $11.4 million forthe third quarter of 2007 from $7.3 million for the third quarter of 2006. Forthe first nine months of 2007, cost of product sales increased by $11.2 millionto $22.8 million, up from $11.6 million for the first nine months of 2006. The increase for both the third quarter and the nine-monthperiod of 2007 was primarily attributable to the increase in the number ofBioThrax doses delivered, coupled with increased costs associated with ourannual production shutdown, the related impact on production yield and thewrite-off of waste during the period. In addition to the normal variation in cost of production,the discounted price, which again was a discount that was a part of thenegotiated contract and applies only to those doses sold in the third quarteras well as a portion of the remaining doses to be sold to HHS by year-end. So the discounted price for product delivered in thirdquarter negatively impacted the gross margin for the third quarter. This impactwill carry into the fourth quarter, but not beyond that. Looking at research and development expense, as we discussedin second quarter, we began an increase in the level of investment in R&Dback in third quarter of 2006. The R&D investment for the third quarter of2007 is actually less than the third quarter of 2006 and the increase inspending for the first nine months of 2007 is a reflection of that increasedlevel of investment overall in R&D as we continue to advance our productsin their pipeline. When comparing third quarter of 2007 to third quarter 2006,research and development expenses decreased by $700,000 to $12.8 million from$13.5 million in 2006. For the first nine moths of 2007, research anddevelopment expenses increased by $12.5 million to $41.7 million, up from $29.2million for the first nine months of 2006. In evaluating the R&D spending for both the thirdquarter and the first nine months of 2007, the primary driver was the effort toadvance all of our product candidates as we completed various studies and begansubsequent studies and trials. As we begin to enter later stage trials for our variouscandidates, we may need to again increase R&D spending. Consistent with ourstrategy, we would manage these costs through non-dilutive partnerships withindustry, government and non-government entities. Moving on to SG&A expense, as we have highlighted inprior quarters, our investment in G&A began to ramp up also in Q3 2006 inpreparation for our IPO. Recently, the rate of increase in G&A spending hasbegun to slow as we have established the infrastructure to manage our Company. For the third quarter of 2007, selling, general andadministrative expenses increased by $3.8 million to $15 million, up from $11.2million for the third quarter of 2006. The increase in G&A spending was primarily attributableto an increase in general and administrative expenses for the addition ofpersonnel related to our transition to being a publicly traded company andincreased legal and other professional services for our headquartersorganization. For the first nine months of 2007, selling, general andadministrative expenses increased by $8.5 million to $38.9 million, up from$30.4 million for the first nine months of 2006. The increase in spending forthe nine-month period was driven by the same factors as for the third quarter. Turning to net income, net loss, we reported net income of$2.8 million for the third quarter 2007, or $0.10 per share, as compared to netincome of $4.4 million, or $0.19 per share, in the third quarter of 2006. Thedecrease in net income was driven primarily by a $3.1 million increase inoperating expenses. For the nine months of 2007, we reported a net loss of $4.8million, or $0.17 per share, as compared to a net loss of $3.3 million, or$0.15 per share, for the first nine months of 2006. The increase in net losswas driven by an increase in revenues of $27 million, which was offset by anincrease in cost of goods sold and operating expenses. Looking at the balance sheet, as Fuad mentioned, cash andcash equivalents at September 30th was $24.3 million, with an additional $42million in accounts receivable generated by our product sales at the end ofSeptember to HHS under the new contract. During the nine months, the net decrease in cash and cashequivalents of $52 million resulted primarily from operating expenses,including research and development, capital expenditures, the payment of 2006income taxes and the repayment of an existing revolving line of credit. This was offset by collection of accounts receivable relatedprimarily to amounts due from HHS and the DoD that were billed in December of2006 and received in January 2007. Additionally, in the third quarter we received approximately$15 million in net proceeds related to an increased loan agreement with HSBCthat was completed at the end of the second quarter. Moving on to our guidance for 2007, as Fuad indicated in hisremarks, we are increasing our financial guidance for 2007 revenue.Specifically, we anticipate growth in total revenues of 16% to 18% basedprincipally on delivering doses according to the schedule in the HHS contract. With respect to net income, we continue to expect to achievepositive net earnings for 2007. This as well is predicated on deliveriesaccording to schedule as well as continued management of operating expenses. Please note that any statements about the company'sprospects or future expectations are forward-looking statements. As Bob statedearlier, forward-looking statements involve substantial risks anduncertainties, and actual results may differ materially from expectations. Please refer to our press release on our financial resultsissued earlier today and to our filings with the SEC for more information onthe risks and uncertainties that could cause actual results to differ. That concludes my prepared comments, and I will now turn thecall back to the operator so we can begin the question-and-answer portion ofthe call. Operator, please proceed.

[Operator:]

(Operator Instructions) And our first question comes fromthe line of Gene Mack with HSBC Securities. Please proceed.

[Gene Mack:]

Thanks. Fuad, I wonder if you could just give a little moredetail on. I mean I guess if I do the back calculation, I think I come up withabout -- again took consideration of discount something like 2.5 million dosesdelivered. Can you just give us an idea of how many doses weredelivered to HHS, how many you'll deliver by year-end and what's left ininventory right now?

[Fuad El-Hibri:]

Well, the delivery schedule is one thing that we do notdisclose. All I can say is that we are on track with delivering, I would say, atleast 6 million doses by year-end.

[Gene Mack:]

Okay. And can you just comment on how much is in inventoryright now?

[Fuad El-Hibri:]

That's also something that I'm sorry I can't comment on.

[Gene Mack:]

Okay. Can you give us a little bit more detail on what theoperational requirement is for DoD on sort of an annual basis or what ballparknumber of doses that might amount to?

[Fuad El-Hibri:]

Again, when you look at the historic requirements over thelast few years, you'll see that it has been somewhere between 1.5 million to 2million doses a year. As recent as some discussions we had very recently, DoDconfirmed that that requirement stands. So I can say with some confidence that1.5 million to 2 million doses is not an unreasonable expectation going forwardannually.

[Gene Mack:]

Is it safe to say that the mandatory injections haven'tnecessarily raised that requirement just yet?

[Fuad El-Hibri:]

Well, there are lot of moving pieces. One is the nature ofthe immunization program, whether it is mandatory or voluntary. Then also inwhat arenas are we actively engaged. And then also the rotation strategy ofmilitary personnel in and out of these theaters. So, there's really a lot of variables that affect the exactrequirement. But if you look back and from what we've heard looking forward, Ibelieve that 1.5 million to 2 million is a very reasonable range.

[Gene Mack:]

Okay. I've got more questions, but I'll jump back in thequeue.

[Fuad El-Hibri:]

Thank you, Gene.

[Operator:]

Our next question comes from the line of Richard Smith withJPMorgan. Please proceed.

[Richard Smith:]

Yes, good morning, everyone. Just a quick question on AIG.Could you just give us a sense, and apologies if you mentioned this in yourcomments, with respect to timing of a potential contract from HHS? I think yousaid previously in 2009. Is this something that could happen in 2008, and whatneeds to be done to get it?

[Fuad El-Hibri:]

That's a very good question because with the introduction ofBARDA, which helps the developers through the advanced development stage ofproduct development, actually could mean that for the next year or two years wecontinue working on funding with BARDA. The procurement would, could come really at any time, but Iwould estimate that with the introduction of BARDA that that typically happenswhen you're reasonably close to having a licensable product. And as we said earlier, we expect that our product will belicensable by '09 and certainly in '08, an event I would not exclude fromhappening. So it's really something that could happen anytime late '08, early'09.

[Richard Smith:]

So I mean if we look at what Cangene has with respect todata when they got their contract, what did they have in hand when theyreceived it from the HHS?

[Fuad El-Hibri:]

Well, we can't really comment other than that we believe itwas relatively early stage. And I think the government had, since the BARDAintroduction and since some lessons that HHS has learned, I think now they waitfor product to become more mature before they actually issue a procurementcontract. Because as we stated earlier that under a procurementcontract, at least prior to the BARDA authority, there typically weren't anyadvance payments made. And the developer had to basically develop at risk untilsuch time as they could deliver licensable product into the Strategic NationalStockpile. So I think that the paradigm has somewhat changed to whereBARDA now enters into a development contract with developers, and once aproduct is developed to a point where it's late stage, I think then thatproduct becomes interesting for a procurement by HHS.

[Richard Smith:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Eric Schmidt withCowen. Please proceed.

[Eric Schmidt:]

Hi, good morning. Fuad, what drives your confidence that theDoD is still interested in completing a procurement contract and that this GAOreport won't lead to maybe better cooperation and a shifting of BioThrax fromone agency to the other?

[Fuad El-Hibri:]

Thanks, Eric. I do agree that it may shift the procurementof additional doses from DoD to HHS and that's exactly, I believe, as Iunderstand it, the GAO report suggests and the Presidential Directive suggests. But that doesn't really speak to the requirements of DoD. Idon't think that the GAO nor the Presidential Directive address at all therequirements. I think the requirements remain, and it's a question of whetherit is going to be in a separate contract with us and DoD or that it may beprocured through HHS. So we do expect once the workings between the two governmentagencies have been sorted out, that it will result in either an increase in HHSprocurement from us or a direct contract between DoD and us.

[Eric Schmidt:]

The total number of doses between the two agencies you expectto decline modestly versus your previous expectation three months ago?

[Fuad El-Hibri:]

No. I would still believe that the total requirements forDoD remain and that there's a good possibility that HHS will make thecommensurate adjustment to the contract.

[Eric Schmidt:]

I guess, I'm a little bit confused. Maybe we need to stepback a bit. But I had read that the GAO contract is suggesting that there'ssome wastage and that if the two agencies were in better communication, productfrom HHS that was going to go back could be shipped to DoD with a commensuratedecrease in the overall requirements for the government. Is that incorrect?

[Fuad El-Hibri:]

It's a good question. It would require a lot of logisticalcoordination to manage effectively doses that are getting close to expiring. Sothat's, again, I can't sit here other than to tell you that the DoD requirementstands and that I believe that the HHS contract would be adjusted accordingly.

[Eric Schmidt:]

Okay.

[Fuad El-Hibri:]

And how logistically maybe this gives an opportunity for HHSto maintain more dated product in the stockpile.

[Eric Schmidt:]

Okay. And is the DoD, RFP still out there?

[Fuad El-Hibri:]

It's still out there, yes. It wasn't formally withdrawn. SoI think that the GAO report and the Presidential Directive I think may havealso taken DoD a bit by surprise. So they're still evaluating the consequences, and theyconfirm to us that the requirement stands. How they're going to procure isgoing to be discussed with HHS.

[Eric Schmidt:]

Okay. And last question on this issue, do you have anyvisibility into where the DoD's inventory is in order that they have, ineffect, seemed to continue to satisfy this requirement?

[Fuad El-Hibri:]

Well, we neither have a visibility into it nor do would webe able to disclose it. So I can't help you with that.

[Eric Schmidt:]

Okay. And then a question for Don on the SG&A run rate.Is the $15 million in Q2 an estimate to base off going forward, or were theresome sort of one-time legal costs and others that bumped that up sort ofartificially?

[Don Elsey:]

I'm assuming you meant to say Q3?

[Eric Schmidt:]

Yes. Sorry.

[Don Elsey:]

Okay. There was some additional activity in Q3 that takes itsomewhat higher than our run rate. But if you take a look over the past coupleof quarters and average those out, I think you'll see pretty much a run ratethat you can develop from there.

[Eric Schmidt:]

Okay. And last question on AIG, have you started humantrials yet?

[Fuad El-Hibri:]

No, we haven't. We're preparing for it.

[Eric Schmidt:]

Will that be a Q4 event or an early '08 event?

[Fuad El-Hibri:]

What we can say right now is that it's going to be an '08event.

[Eric Schmidt:]

Okay. Thank you.

[Operator:]

(Operator Instructions) Our next question is a follow-upfrom the line of Gene Mack with HSBC Securities. Please proceed.

[Gene Mack:]

Thanks for taking a follow-up. Wondering if you could just,Fuad, I apologize if you mentioned this already but could you just give us alittle more detail on the typhoid vaccine and timelines there in terms ofmoving forward?

[Fuad El-Hibri:]

Yes, what I mentioned earlier is that we are stillfinalizing the review of the data. We've given some preliminary data to youalready. We expect that to be completed by the end of this year. And then in terms of milestones going forward, we anticipatea study in the U.S. that would where we would use the scaled-up material. Sowe've completed our process development and process scale-up. We would use the scaled-up material in a small study here inthe U.S. in '08. And we would also expect to commence a small study leading upto a Phase III study in India in children two to five. So those are the twoevents, the two commencements of trials that we expect in '08.

[Gene Mack:]

Okay. And that could be anytime in 2008?

[Fuad El-Hibri:]

Sorry?

[Gene Mack:]

And that could be anytime during 2008?

[Fuad El-Hibri:]

Yes. And then in 2009, we expect to commence thefull-fledged Phase III study.

[Gene Mack:]

Okay. And question on R&D, Don, and I apologize if youwent through this as well. It looks like the trend continued to go down overthe last three quarters. Just wondering where that ends up maybe for this yearand what you're thinking in terms of next year as far as directionally where itgoes? Thanks.

[Don Elsey:]

Well, we're not in a position to provide guidance at thispoint in 2008. I will tell you that as you step back to third quarter of 2006,as I referenced, we basically took a step up in the investment level inR&D. And then as you go quarter-by-quarter, as various trialscomplete or commence, and as you probably know, we subcontract out a fairamount of development activity, you're going to have contracts that come tofruition and contracts that are completed, and you're going to see somevariation in the run rate. But that the investment levels that you've seen over thepast couple of quarters again, if you take a look at those, you're going to geta fairly good run rate from the steady state perspective that you could use. As I mentioned in my comments and as Fuad just indicated, aswe approach 2009 and beyond and we get into some of the Phase III trials, youcould expect reasonably that the investment in R&D will increase again, andwe'll mange that internally and hopefully with partners of a non-dilutivenature.

[Gene Mack:]

Okay. And just one final question. You mentioned that therewas a meaningful sale to another government agency, another foreign government,allied government. And I'm just wondering; if you care to maybe give a littlemore detail on who that is? Was it somebody that you've dealt with in the past as far asordering, or is this a new customer?

[Fuad El-Hibri:]

What I can disclose is that it was approximately $2 million.What I can't disclose by agreement with that government is I can't tell youwhich government, and I can't tell you how many doses. But I can tell you itwas $2 million, and it was in line with our standard international sales prices.

[Gene Mack:]

Was it somebody you've dealt with in the past or …?

[Fuad El-Hibri:]

I'm sorry, I can't answer that.

[Gene Mack:]

Okay, thanks.

[Fuad El-Hibri:]

Thank you.

[Operator:]

Our next question comes from the line of Daniel Mallin withWBB Securities. Please proceed.

[Daniel Mallin:]

Hi, guys. Thanks, and congratulations on the quarter. Quickquestion. Was wondering if you can give us an update on the shelf lifeextension program with the FDA? Specifically, what would you expect withrespect to timing? And if you could state if you know whether or not thisextension, once it were to go into effect, would it apply to only futureshipments or would it also to apply to shipments that have already been madeand out in the field? And I'm wondering, if you can give us a little bit of color,I guess the discount that you received on or that was applied to doses thatwere previously shipped with slightly shorter shelf life, I think, you alsohave an increase in the price that's tied to the shelf life extension. If youcan just give a little bit more color on that, I'd appreciate it.

[Fuad El-Hibri:]

Yes, absolutely. First of all, we do have till September2010 to get four-year dating approved by FDA. Second, we retroactively, so tospeak, would get a price bump of those doses that we've already delivered, andwe'll get a higher price for those doses to be delivered. Now, the first 5.5 million doses, however, won't beadjusted. So that was because we were building up inventory and because thenegotiations with the government took a little longer than expected, and thosedoses in inventory had a slightly shorter shelf life. So we made a concession and sold those to the government ata reduced price, which won't be recouped. But beyond the 5.5 million doses, theremaining doses, if we get four-year dating approved by FDA, then whether it'sprospectively or retroactively, we would get the higher price. Now, and I'm trying to remember every element of yourquestion. And as to how soon we might get an approval, I can only tell you thatwe are working it very carefully and diligently. The timeline is pretty much inFDA's hands. And we are collaborating, cooperating, and we hope thatwe'll be able to complete that within that timeframe.

[Daniel Mallin:]

So the timeframe is by 2010?

[Fuad El-Hibri:]

Yes.

[Daniel Mallin:]

So it's reasonable to think that this is not going to happenanytime within the next year or year and a half?

[Fuad El-Hibri:]

No. I'm sorry; I didn't mean to communicate that. I'm justsaying we have until that time, until 2010 to do it. We expect it significantlyearlier than that.

[Daniel Mallin:]

Okay. And I think I heard you say that the approval could beeither for all future doses or could also apply to doses previously shipped?

[Fuad El-Hibri:]

No, the approval applies only to future doses. But thepayment also calls back to previous shipments.

[Daniel Mallin:]

Okay, that's all I was interested. Thank you very much.

[Fuad El-Hibri:]

Thank you.

[Operator:]

At this time there are no questions in queue. I would nowlike to turn the call back over to Robert Burrows for closing remarks.

[Robert Burrows:]

Thank you. Ladies and gentlemen, that concludes today'scall. We certainly appreciate your collective participation. Please note thattoday's call has been recorded and a replay will be available beginning latertoday through November 16th. Alternatively, there's available a webcast of today's call,an archived version of which will be available later today, accessible throughthe Company's website, again at www.emergentbiosolutions.com and clicking onthe investors tab. Thank you again, and we look forward to speaking to you allin the future. Thank you.

[Operator:]

Thank you for your participation in today's conference. Thisconcludes your presentation. You may now disconnect. Good day.